As we approach then end of the year it will be open enrollment season at most employers. There is a wide array of plans available and each employers choices will vary from PPO, HMO and HDHP (High Deductible Health Plan). Ultimately the right plan for you will depend on your overall health. If you are relatively young and healthy a HDHP might be a good choice as it will save you money and open the opportunity for some tax free growth. Today we will discuss the benefits of an HSA.
What is an HSA?
An HSA (Health Savings Account) is a savings account that can be used for reimbursement of medical expenses. The plan is funded with pre tax money, lowering your taxable income and grows tax free. You do not have to take the reimbursement in the same year as the expense, which allows you to let the account grow an compound.
For 2022 the contribution limits are –
- Single/Self $3650 or Family $7300 with a $1000 catchup if your are 55 or older.
2023 will see an increase in these limits and they are as follows –
- Single/Self $3850 or Family $7750 the catchup for 55+ remains the same $1000
Some employers even offer a perk and will contribute an amount towards an HSA, kind of like a 401K match. Just remember the limits stated above are for all deposits be it yours or your employers.
What can I be reimbursed for?
Anything from copays, deductibles, prescription medication the IRS has details here.
So how is this an investment vehicle?
The HSA was established to help offset your deductible payments and a majority of participants use it as intended. A savvy investor will fund his or her HSA and pay for medical out of pocket and retain those receipts. Once the money is in the HSA account you can choose to leave it alone same as a savings account at a bank or you can invest it in a mutual fund. $7,000 each year into an S&P 500 mutual fund over the coarse of 30+ years will net a nice return.
Sounds too good to be true, What’s the catch?
As previously stated, when making withdrawals the funds have to be used for qualified medical expenses. At age 65, you can withdraw your HSA funds at any time although they are subject to regular income tax. You can avoid paying taxes by continuing to use the funds for qualified medical expenses. You might be healthy today but as you get older medical issue will arise, and an HSA can be there to offset those future costs with tax free growth.
So if you already max out your 401K and Roth IRA take some time to review your employers benefits during open enrollment this year. An HSA is a powerful savings tool.